Who cares what the ratings agencies think anyway?

It’s a sword dangling over George Osborne’s head – the threat of agencies like Fitch, Moody’s and Standard & Poor’s to downgrade Britain’s international credit rating.

Any such move would be politically embarrassing, but would it have any practical significance?Other countries, such as Japan and America, have been downgraded, but without much impact on the rates at which their governments can borrow.

Furthermore, why should we care about agencies that were handing out triple-A ratings to investment products that have caused so much trouble in recent years. In fact, many people have asked why these agencies aren't being sued, or even prosecuted, for their role in the financial crisis.

As it happens, one of the big three credit rating agencies – Standard & Poor’s – is being sued: For several billion dollars by the US Department of Justice.

“One of the most surprising aspects of the Justice Department’s five-billion-dollar lawsuit against Standard & Poor’s, which the D.O.J. accuses of defrauding investors by issuing ratings on subprime mortgage securities that it knew to be misleading, is that the settlement talks broke down. According to a story in the Times, McGraw-Hill, S. & P.’s parent company, decided to take its chances in court rather than accept a billion dollar fine and admit wrongdoing, which could have made it vulnerable to more lawsuits from investors.

“McGraw-Hill did this fully aware that, in handing over some twenty million pages of e-mails to government prosecutors, it presented them with some pretty damaging stuff, including a number of messages in which S. & P. employees criticize the firm’s rating process and seemingly acknowledge that it issued generous ratings to please its customers…”

Twenty million pages of emails – think about that the next time you complain about the paperwork in your in-tray! Though people are understandably angry about the lack of action taken against those individuals and institutions who were responsible for the financial crisis, it’s worth bearing in mind the sheer amount of work involved in preparing a case that will stand up in court.

Cassidy cautions that the case against S & P is far from being open-and-shut:

“…bad publicity doesn’t necessarily equate to a defeat in court. To prove its case, the government will have to persuade a jury that the firm deliberately misled the purchasers of sub-prime mortgages, and that it wasn’t merely caught up, along with its rivals, in the euphoria of a bubble.”

Whatever the failings, misdemeanors and outright crimes of any particular financial institution, we must never forget the context in which they took place. The “bubble” that Cassidy refers to wasn’t something generated all by itself on Wall Street or the City of London, it was the direct result of a massive expansion of credit for which the politicians of the era were as responsible as any financier.